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How Much Should a Small Business Spend on IT?

small business IT cost image

Running a business is no easy feat. You’ve got customers, patients or clients to satisfy, supply chains to monitor, vendors to coordinate, employees to care for, marketing to manage, and future plans to lay. And on top of all that, there’s your IT infrastructure to maintain and protect.

It may not be high on the list of your priorities. We’d all love a “set it and forget it” IT environment, but that’s neither realistic nor secure. If you aren’t paying close enough attention to your IT—and more importantly, if you aren’t allocating the right amount of budget toward it—your entire business could suffer.

Manage Your Business, Not Your Tech Stack

But what is the right amount of budget? How much should you spend on your infrastructure… or where should you cut back? What should you allocate for hardware, software, data storage and ongoing support? Can you manage it in-house, or should you outsource? The last thing you need to worry about is the latest software release, who’s providing your employees’ tech support, or whether you should store your data in an onsite server vs. the cloud.

You’re running a business after all, not an IT department.

The considerations are many and may seem overwhelming, especially when tech isn’t your area of expertise.

In this guide we’ll lay out a number of the factors you should examine, including what represents an “average” IT budget for small businesses and how you can calculate your own estimated IT costs, so you’ll feel more confident evaluating your budget and assessing if you’re spending the right amount on your IT.

Trends in Small Business IT Spending

The biggest challenge for many businesses, large and small, is considering everything that goes into IT and exactly what you’ll need to efficiently and successfully operate. This is complicated, of course, by constant and significant advances in technology.

Advances mean improvements, and improvements often equal higher costs.

So if your budget remains static year-over-year, your tech won’t be keeping up, and you’ll be at risk of falling behind your competitors.

To best determine how much you should allocate to your IT budget, it can help to investigate what your peers and competitors are doing.

In late 2018, Software analysts Capterra asked more than 700 US-based small and medium-sized businesses (SMBs) about their future purchasing intentions and budgets for business software. The results revealed a clear and notable trend:

Across all companies with 2 to 249 employees and all industries, SMBs were allocating budget to four business technologies: finance and accounting, cloud computing, data security and digital marketing.

Two years later, these four items should remain a key piece of most small business technology spending plans:

  • Finance and accounting software: table stakes for every business, and crucial for those lacking skilled accounting staff. You simply can’t operate without efficient financial software, so a notable investment in this category is warranted.
  • Cloud computing: the beauty of cloud-based tech is the offset in equipment costs. Planning a system upgrade? No longer must you carve out a huge portion of your budget for hardware. And with “as a service” purchase options, you buy only the computing power you need, as you need it. The cloud really is a great equalizer, and should be among your IT budgeting considerations.
  • Data security: tougher privacy regulations, unpredictable cyberattacks and the growing threat of personal data thefts mean securing your data and that of your customers, patients and clients is imperative.
  • Digital marketing: it may not be the first thing that comes to mind when planning your IT budget, but if you intend to grow your business, you’ll likely do some digital advertising. That means you’ll need an ad budget and a website to receive the traffic from those ads. And if you’re considering any ecommerce, you might need to plan for a web developer’s assistance. Thinking even further, many CRM’s now tie into your website. So digital marketing is definitely a technology expense that needs to be accounted for.

What Percentage Of Revenue Do Small Businesses Spend On IT?

Of course, those four items are primarily software-based and make up only a portion of the average small business technology spend. You’ll also need to consider things like equipment (this includes all your computing devices, phones and other machines required to do business), business intelligence/analytics and tech support.

And when you do, you won’t be alone. According to the Computer Economics 2019/2020 IT Spending and Staffing Benchmarks study, though IT budgets are diversified, businesses across all sizes and sectors are spending the majority of those funds on cloud technology, as shown in the chart below.

At this point you may be wondering where you’ll find all the dollars to support upgrades and new tech along with traditional needs. Some good news: that same Computer Economics study concluded that regardless of industry or company size, IT budgets are expected to increase in the coming years.

Small businesses (i.e., those with IT operational budgets of less than $5 million) can expect to see an average increase of 3.5 percent, regardless of industry.

Additionally, ROI consultancy Alinean Inc. found that US-based small companies (those with less than $50 million in revenue) often outspend larger organizations. In fact, small and medium business IT spend as a percentage of revenue nets out around 6.9 percent.

Among the bigger items you may need to consider in your IT budget is how to manage ongoing tech support. Most small businesses can’t dedicate a staffer to managing the company’s IT.

Sure, you might ask your office manager to serve as de facto tech support, but that’s unlikely to provide the optimal results you’d get from a dedicated expert.

IT Support Expenses

The average cost of IT support for small businesses can vary widely. Conservative estimates for a dedicated in-house IT tech hover around $58,000 annually. Alternatives include retainer-based IT support companies, available as needed and for periodic check-ins.

Managed/remote monitoring services are also an option, particularly for more complex IT environments. And though the latter two options may seem initially extravagant, depending on your individual needs, they can be much more cost efficient than retaining an in-house support employee, particularly given the added value an outsource option can provide.

What to Consider When Calculating Your IT Costs

Now that you know a bit more about common areas for tech spending, how much of your company’s revenue you may have to work with, and your options for retaining technical support, you’re in a better position to start evaluating your IT requirements and crunching your own numbers.

Like any good plan, consider starting with where you are now and where you want to go:

  • First, establish your baseline. What was your most recent IT spend? What does your budget look like now?
  • Next, evaluate your business goals. This might mean collaborating with other leaders at your company, to ensure everyone is aligned.
  • Then, consider how newer, better, or just better monitored technology can keep your company focused on meeting those business goals.
  • Finally, determine where you can adjust your existing technology spend to realize those goals.

Some costs will be one-time, some periodic, and some recurring. This means you’ll likely want to have a plan for annual IT spend, as well as longer-term plans (think three and five years out).

Of course, if you’re just getting a new business off the ground, you’ll have unique IT-related considerations that established companies won’t. These can include:

  • Equipment: all your computers and the supporting infrastructure (or your cloud service), plus phones (landline and mobile), point-of-sale, and any other machines tied to your tech.
  • Software and services: what programs and systems will you need to run your business?
  • Website: securing your domain name, getting it hosted, finding a developer, getting it created (and eventually maintained).
  • Internet service: you’ll need to determine if this is captured as an IT or an operational expense.
  • Marketing and advertising: it may not seem like an IT cost, but as marketing becomes an increasingly digital medium, promoting your business will be ever more reliant on your website and background data gathering tools like Google Analytics.

And whether you’ve been in business for a week, a decade, or a generation, be watchful for hidden costs

For example, every piece of computer hardware will eventually need to be replaced. Those laptops your team uses? They’ll last for about five years, tops. You can save on replacement costs with retail protection plans—but only if you plan ahead.man repairing hard drive in a small office

Finally, if you’ve decided to outsource your tech support, there are a few things you can use as benchmarks for planning purposes.

When estimating the level of support needed, most IT service providers will consider the following three items:

  • Number of devices you have (for example, desktop PCs, laptops, tablets and mobile phones)
  • The amount of staff or “seats” you’ll need supported.
  • How many servers you have.
  • The amount of data to be stored

Using 25 support hours a year per device or server as the standard, and $100 per hour as an average cost, most small businesses can estimate the minimum cost of device support per year with the following formula:

(Number of Devices + Number of Servers) * 25 support hours per year * $100/hr

Your actual amount will vary based on the provider’s costs and the amount of data you need to store. In most cases, small businesses can estimate the yearly cost of cloud storage using this formula.

(Amount of Data to be Stored in GB) / 5

Given the high cost of maintaining an in-house employee, compared with the additional value provided by an outsourced tech support team, most small businesses will carve space in their tech budgets for the external support.

Technology Enabling Business

Every business is unique, and there’s no one-size-fits-all approach to planning for your IT spend. What’s certain, however, is the value technology can bring to businesses of all types. Instead of being viewed as an operational expense, it should be considered an integral piece of any strong business strategy, one that, when managed properly, can help grow revenue, delight customers and meet a host of other business goals.

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